Netflix Earnings: Can the Video-Streamer Outpace Amazon?

Netflix (NASDAQ: NFLX) will release its quarterly report on Wednesday, and even though the stock has soared over the past year, a more recent pullback has led to some nervousness about the coming Netflix earnings report. As competitors Amazon.com (NASDAQ: AMZN) and others on the video-streaming front as well as Outerwall (NASDAQ: OUTR) and its continued Redbox offerings seek to overcome Netflix's first-mover advantage, Netflix has to make the most of its growth opportunities while facing the challenge of rising content costs.

Netflix has seen wild oscillations in sentiment throughout its history, going from euphoria to despair and back to euphoria in just a few short years. Right now, Netflix has been riding on solid growth, but the question that the stock's increasingly rich valuation raises is whether the company can keep growing fast enough to avoid disappointing investors. Let's take an early look at what's been happening with Netflix over the past quarter and what we're likely to see in its report.

Source: Netflix.

Stats on Netflix

Analyst EPS Estimate

$0.66

Change From Year-Ago EPS

408%

Revenue Estimate

$1.17 billion

Change From Year-Ago Revenue

23%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

What's next for Netflix earnings?Analysts have gotten a lot more upbeat about Netflix earnings in recent months, raising their fourth-quarter estimates by $0.20 per share and boosting full-year 2014 projections above the $4 per share mark. The stock has inched up about 3% since mid-October, but it has given up more than $50 per share in gains in less than a month.

Netflix started the quarter with solid positive momentum, as the company's third-quarter earnings report showed a lot of good signs for the video-streaming giant. Revenue jumped 22%, and earnings quadrupled on substantial gains in the number of its streaming subscribers, as Netflix added 1.29 million new paying members domestically. International revenue more than doubled, and Netflix saw 1.44 million more subscriber additions abroad to add to its good fortune. Positive guidance for the fourth quarter ramped up expectations among investors, who now hope to see gains of more than 2 million new domestic subscribers for the just-ended quarter. Moreover, Netflix has successfully managed to move most of its customers from DVD service to streaming, which is something that Outerwall's Redbox continues to struggle to achieve.

But Netflix won't have a free ride in the next wave of streaming growth. Amazon has used its Prime service to drive streaming-video growth, and the company's willingness to do whatever it takes to build a customer base even at the expense of profit margins poses a big threat to Netflix. Moreover, as the companies start to vie directly to build up content libraries, it could raise expenses for both Amazon and Netflix, potentially putting Netflix on the defensive as its investors expect more immediate profitability.

Analysts also fear that Hulu could pose a competitive threat. Morgan Stanley downgraded Netflix stock earlier this month, citing both Hulu and Amazon as weighing on Netflix's growth prospects. Given Hulu's high-profile owners, which make up some of the biggest content-producers in the industry, Netflix could find itself having to deal with high-paced growth from Hulu threatening to thwart its efforts to obtain high-quality content at the prices it wants to pay.

Perhaps the biggest worry investors have now is the recent Verizon (NYSE: VZ) victory over the FCC that could bring about the end of net neutrality. For years, broadband providers have hoped to charge high-bandwidth users for the disproportionate costs they incur, and the federal appeals court decision could eventually give Verizon and other Internet providers the ability to make Netflix pay more to make its service available to users. The question, though, is whether the resulting backlash among Internet customers would do more harm than good to Verizon and its peers, making them step back and restore Netflix availability in a cost-neutral way.

In the Netflix earnings report, watch for CEO Reed Hastings to provide more color on its expected response to the net neutrality debate as well as his view of strategic growth in an increasingly competitive environment. Netflix needs to demonstrate its continued superiority in order to keep its share price moving higher.

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